Many choose mutual funds because they make investing easier and offer access to various companies. But sometimes, without proper checking, investors buy different funds holding the same shares. This is called mutual fund overlap, and it shows that when too much of the same isn’t good in mutual funds, it can quietly raise your risk, especially in uncertain markets.
What Does ‘Overlap’ in Mutual Funds Mean?
Overlap in mutual funds is like investing in two different mutual funds but actually they are the same but looks separate at first glance. However, looking closely, both funds are invested in the same companies. So even though you think your money is spread out, it’s going into the same places. This is when too much of the same isn’t good in mutual funds becomes very real. You lose out on the benefit of diversification and may face more risk than expected. For instance, if you invest in two large-cap funds, both may hold shares of the same top companies. That means your money isn’t spread out as much as you thought. Watch our latest YouTube Video Unlocking the 8th Wonder: SIP, Time & Trust | Mr. Ganesh Mohan | CEO, Bajaj Finserv AMC to gain more deeper insights.
Why Overlapping Investments Can Be Risky
When too much of the same isn’t good in mutual funds, here’s why:
- Less variety in your investments-You may think your money is spread across different sectors or industries, but it’s not.
- Higher risk in market ups and downs-If the same shares are hit during a downturn, your entire portfolio can suffer more than expected.
- Missed chances for better returns-Overlap means you may not be investing in enough different areas to benefit from other growing companies or sectors.
How Can You Spot Overlap in Your Portfolio?
Since too much of the same isn’t good in mutual funds, here’s how to check for overlap:
- Compare holdings-Look at what each of your mutual funds holds. If any of them have the same top companies, that’s a sign of overlap.
- Look at the top investments-Most fund websites or reports show the top companies they’ve invested in. It may be time to review if you see the same names across funds.
- Use online tools-Some websites and apps can help you analyze your mutual fund portfolio. They point out how much overlap there is and help you identify too similar areas.
Simple Ways to Keep Your Portfolio Well-Balanced
Avoiding repetition is key because, once again, when too much of the same isn’t good in mutual funds, balance is everything. You can also check out 10 Books to Enhance Your Mutual Fund Investing Journey!:
- Mix different types of funds-Instead of putting all your money in one kind (like only large companies), try combining large-cap, mid-cap, and other funds to balance risk and growth.
- Check what your funds hold-Make it a habit to look at the companies or sectors in your funds. If you spot the same names repeatedly, consider switching to funds with different focuses.
- Review your investments regularly-The market changes, and so will your fund’s performance. So, reviewing the portfolio every few months is vital to rebalance and stay on track.
- Choose funds with different approaches-Some funds look for fast-growing companies, while others look for stable ones at reasonable prices. Mixing these styles helps avoid too much repetition in your investments.
Wrapping It Up
When too much of the same isn’t good in mutual funds when investing, being proactive is the best approach. Overlap might seem small, but it can affect your returns and increase your risks. By being aware and reviewing your portfolio often, you can avoid this problem and keep your investments in better shape. A well-diversified portfolio is your best friend in both calm and stormy markets.
